West Bengal University of Technology

Summer Project Report A Study on financing of SMES and its credit risk assessment At STATE BANK OF INDIA

By: Munish Kumar Sati

WBUT Regn. No: 081360710115 of 2008-2009 WBUT Roll No: 08136009074

Army Institute of Management Kolkata

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Contents
Acknowledgement Executive Summary Chapter 1 The Company State Bank of India Profile Chapter 2 The Project Scope and Purpose of study Methodology Chapter 3 Data Collection and Analysis Data Collection Data Analysis Chapter 4 Conclusion Findings and Recommendations Constraints And Limitations Appendices & Annexure Bibliography 76 87 54 18 4 5 10

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Guidance-cum-Completion Certificate This is to certify that Mr. Munish Kumar Sati, WBUT registration Number 081360710115 of 2008-2009, WBUT Roll Number 08136009074 has undertaken the project titled "A Study on Financing of SMES and its credit risk management under our guidance from June 14 2009 to August 14 2009 at "State Bank of India" and has completed the said project successfully.

External Guide's Full Signature

_________________________ Mr. A.K. Sarkar Assistant General Manager, State Bank of India SME II, Local Head Office.

Internal Guide's Full Signature

_________________________ Prof. S.N. Bhattacharya Finance Faculty, Army Institute Management, Kolkata-700027
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Acknowledgements

In the very first instance, I would like to thank the organization State Bank of India for providing me with an opportunity to do my summer internship with them.

The Summer Project at State Bank of India offered me both a learning experience as well as a glimpse into the daily management functions of an organization. During the tenure of this project, I was fortunate to have interacted with people, who in their own capacities encouraged and guided me in the best possible manner.

For his aspiring and invaluable guidance, I wish to thank Mr. A.K. Sarkar, without whom this project could not have been successfully realized. I sincerely thank him for advising, guiding, encouraging and mentoring me so frequently. The motivation gained under him was instrumental in achieving the objectives of this Summer Project.

I would also like to express my sincere thanks to Mr. Karan Gupta & Mr. Aftab Ahemad Mallick for their invaluable support and guidance throughout the summer project.

My sincere regards to Mr. S. N. Bhattacharya (internal guide) for his assistance and guidance throughout the training period.

Munish Kumar Sati

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EXECUTIVE SUMMARY

TITLE OF THE PROJECT

A study on financing of SMES and its Credit Risk assessment

BACKGROUND OF PROJECT TOPIC:

Credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms, or in other words it is defined as the risk that a firms customer and the parties to which it has lent money will fail to make promised payments is known as credit risk The exposure to the credit risks large in case of financial institutions, such commercial banks when firms borrow money they in turn expose lenders to credit risk, the risk that the firm will default on its promised payments. As a consequence, borrowing exposes the firm owners to the risk that firm will be unable to pay its debt and thus be forced to bankruptcy.

IMPORTANCE OF THE PROJECT

SME is fast growing sector in the Indian Economy. This sector provides employment to over 42 million people. The MSME sector accounts for 45 per cent of the country's factory output and 40 per cent of exports. Every Bank has given highest importance to financing to SMEs in their strategic growth plan. It has become
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necessary to bring policy shift and create free market environment from regulations & interventions in economic activity. Growth resulting from globalization and liberalization are visible most profoundly in the SME segment. The relationship between the banker and the customer has become most crucial and competitive. The technology has entered the scene almost as a natural corollary of liberalization. Liberalized policies provide ample opportunities to Indian Market to compete with developed and developing countries.

The project helps in understanding the clear meaning of credit Risk Management in State Bank of India. It explains about the credit risk scoring and Rating of the Bank. And also Study of comparative study of Credit Policy with that of its competitor helps in understanding the fair credit policy of the Bank and Credit Recovery management of the Banks and also its key competitors.

OBJECTIVES OF PROJECT
The project involves study of loan proposal processing in SME segment. It involves a thorough assessment of various parameters before approval of any loan or advance. To understand various kind of financing arrangement for both project financing and working capital requirement.

 To understand various parameters used in credit risk assessment and the procedure of credit risk assessment in SME department in State Bank of India.

METHODOLOGY:
To fulfill the objectives of my study, I have taken both into considerations viz primary & secondary data. Findings:

Recovery of Credit: SBI recovery of Credit during the year 2006 is 62.4% Compared to other Banks SBI s recovery policy is very good, hence this reduces NPA Total Advances: As compared total advances of SBI is increased year by year. Project findings reveal that State Bank of India is lending more credit or sanctioning more loans as compared to other Banks. Credit risk management process of SBI used is very effective as compared with other banks.

RECOMMENDATIONS:
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Banks are making rapid growth by increasing their exposure. Along with more exposure to credit sanctioned comes more risk. So, in order to survive in this present scenario of tough competition, the banks have to adopt the best possible way to negate the possibility of a non-performing asset (NPA).this can be achieved only with better credit risk management The Bank should keep on revising its Credit Policy which will help Banks effort to correct the course of the policies

CONCLUSION:

The project undertaken has helped a lot in gaining knowledge about the SBIS financing to SMEs and its credit Risk assessment process in State Bank of India. Credit Risk Policy of the Bank has become very vital in the smooth operation of the banking activities. Credit Policy of the Bank provides the framework to determine (a) Whether or not to extend credit to a customer and (b) How much credit to extend. The Project work has certainly enriched the knowledge about the effective assessment of loan proposal

COMPANY PROFILE

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State Bank of India (SBI) is the largest bank in India.SBI provides a range of banking product and services through its vast network in India and overseas. The State Bank Group, with over 16000 branches, has the largest branch network in India. With an asset base of $250 billion and $195 billion in deposits, it is a regional banking behemoth. It has a market share among Indian commercial banks of about 20% in deposits and advances, and SBI accounts for almost one-fifth of the nations loans. For financial year 2009 State Bank of Indias net profit has increased to Rs.9121 crore, up by 35.5% as compared to Rs.6729 crore in financial year 2008.Advances are up by Rs.126,231 crore and are spread across many sectors. The loan book is well diversified across segments. The Non Performing Assets (NPA) is found to be under control. Gross NPA ratio has decreased from 3.04% in March 2008 to 2.84% in March 2009. Market share in advances has increased from 15.20% in March 2008 to 16.03% in March 2009.

History The foundation roots of the State Bank of India can be traced back to as early as the beginning of 19th century, when the Bank of Calcutta, which was later renamed the Bank of Bengal, was established on 2 June 1806. The Bank of Bengal and two other Presidency banks, namely, the Bank of Bombay (incorporated on 15 April 1840) and the Bank of Madras (incorporated on 1 July 1843). All three Presidency banks were incorporated as joint stock companies, and were the result of the royal charters. These three banks received the exclusive right to issue paper currency in 1861 with the Paper Currency Act, a right they retained until the formation of the Reserve Bank of India. The Presidency banks amalgamated on 27 January 1921, and the reorganized banking entity took as its name Imperial Bank of India. The Imperial Bank of India continued to remain a joint stock company. In accordance with the provisions of the State Bank of India Act (1955), the Reserve Bank of India, which is India's central bank, acquired a controlling interest in the Imperial Bank of India. The
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Government of India nationalized the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the Government took over the stake held by the Reserve Bank of India. The Govt. of India acquired the Reserve Bank of India's stake in SBI so as to remove any conflict of interest as RBI is the country's banking regulatory authority. In 1959 the Government passed the State Bank of India (Subsidiary Banks) Act, enabling the State Bank of India to take over eight former State-associated banks as its subsidiaries. On Sept 13, 2008, State Bank of Saurashtra, one of its Associate Banks, merged with State Bank of India. SBI has acquired local banks in rescues. For instance, in 1985, it acquired Bank of Cochin in Kerala, which had 120 branches. SBI was the acquirer as its affiliate, State Bank of Travancore, already had an extensive network in Kerala. Associate banks There are six associate banks that fall under SBI, and together these six banks constitute the State Bank Group. All use the same logo of a blue keyhole and all the associates use the "State Bank of" name followed by the regional headquarters' name. Originally, the then seven banks that became the associate banks belonged to princely states until the government nationalized them in 1969. In tune with the first Five Year Plan, emphasizing the development of rural India, the government integrated these banks into State Bank of India to expand its rural outreach. There has been a proposal to merge all the associate banks into SBI to create a "mega bank" and streamline operations. The first step along these lines occurred in September 2008 when State Bank of Saurashtra merged with State Bank of India, which reduced the number of state banks from seven to six. Furthermore on 19th June 2009 the SBI board approved the merger of its subsidiary, State Bank of Indore, with itself. SBI holds 98.3% in the bank, and the balance 1.77% is owned by individuals, who held the shares prior to its takeover by the government. The acquisition of State Bank of Indore will help SBI add 470 branches to its existing network of 11,448. Also, following the acquisition, SBIs total assets will inch very close to the Rs 10-lakh
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crore mark. Total assets of SBI and the State Bank of Indore stood at Rs 998,119 crore as on March 2009. Banking Subsidiaries State Bank of India has the controlling interest in its six Associate Banks (ABs) ranging from 75% to 100%. 1. 2. 3. 4. 5. 6. State Bank of Bikaner and Jaipur (SBBJ) State Bank of Hyderabad (SBH) State Bank of Indore (SBIR) State Bank of Mysore (SBM) State Bank of Patiala (SBP) State Bank of Travancore (SBT)

The six ABs have a combined network of 4502 branches in India which are fully computerized and 2410 ATMs networked with SBI ATMs, providing value added services to clientele. The combined net profit of the subsidiaries of SBI increased by 12%, over the previous year to reach Rs. 2277.69 crores. Deposits and advances grew by 19% and 22%, respectively, during the year. The combined Net NPA ratio of all ABs was at 0.61% as on 31st March 2008.The highlights of performance of the six ABs for the year 200708 are as follows:

International presence Regional office of the State Bank of India (SBI), India's largest bank, is in Mumbai. The government of India is the largest shareholder in SBI. The bank has 52 branches, agencies or offices in 32 countries. It has branches of the parent in Colombo, Dhaka, Frankfurt, Hong Kong, Johannesburg, London and environs, Los Angeles, Male in the
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Maldives, Muscat, New York, Osaka, Sydney, and Tokyo. It has offshore banking units in the Bahamas, Bahrain, and Singapore, and representative offices in Bhutan and Cape Town. SBI operates several foreign subsidiaries or affiliates. In 1990 it established an offshore bank, State Bank of India (Mauritius). It has two subsidiaries in North America, State Bank of India (California), and State Bank of India (Canada). In 1982, the bank established its California subsidiary, which now has seven branches. The Canadian subsidiary was also established in 1982 and also has seven branches, four in the greater Toronto area, and three in British Columbia. In Nigeria, it operates as INMB Bank. This bank was established in 1981 as the Indo-Nigerian Merchant Bank and received permission in 2002 to commence retail banking. It now has five branches in Nigeria. In Nepal SBI owns 50% of Nepal SBI Bank, which has branches throughout the country. In Moscow SBI owns 60% of Commercial Bank of India, with Canara Bank owning the rest. In Indonesia it owns 76% of PT Bank Indo Monex. State Bank of India already has a branch in Shanghai and plans to open one up in Tianjin. State Bank of India has presence in Dubai International Financial Centre, Dubai, United Arab Emirates.

Group companies SBI Capital Markets Ltd SBI Mutual Fund (A Trust) SBI Factors and Commercial Services Ltd SBI DFHI Ltd SBI Cards and Payment Services Pvt. Ltd SBI Life Insurance Co. Ltd - Banc assurance (Life Insurance) SBI Funds Management Pvt. Ltd
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SBI Canada

JOINT VENTURES
SBI Life Insurance Company Ltd (SBI LIFE) SBI Life Insurance, Indias largest private life insurance, is a joint venture between State Bank of India and BNP Paribas Assurance SBI owns 74% of the total capital and BNP Paribas Assurance the remaining 26%. SBI Life Insurance has an authorized capital of Rs. 2,000 crore and a paid up capital of Rs 1,000 crores. BNP Paribas Assurance is the insurance arm of BNP Paribas Euro Zones leading Bank. BNP Paribas, part of the Worlds top 10 groups of banks by market value and part of Europe top 3 banking companies, is one of the oldest foreign banks with a presence in India dating back to 1860. BNP Paribas Assurance is the fourth largest life insurance company in France, and a worldwide leader in Creditor insurance products offering protection to over 50 million clients. BNP Paribas Assurance operates in 41 countries mainly through the banc assurance and partnership model. SBI Life Insurances mission is to emerge as the leading company offering a comprehensive range of Life Insurance and pension products at competitive prices, ensuring high standards of customer service and world class operating efficiency. SBI Life has a unique multi-distribution model encompassing Banc assurance, Agency and Corporate Solutions. SBI Life extensively leverages the SBI Group relationship as a platform for cross-selling insurance products along with its numerous banking product packages such as housing loans and personal loans. Agency Channel, comprising of the most productive force of over 68,000 Insurance Advisors, offers door to door insurance solutions to customers.
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Business highlights: SBI stand-alone net profit crosses Rs. 9,121 croreFor FY 09, Net Profit for FY 09 increased to Rs 9,121 crore, up by 35.55% as compared to Rs 6,729 crore in FY08For Q4 FY 09 Total stand-alone business growth of Rs 330,899 crore in FY 09, including international business growth of Rs 39,385 crore Deposits up by Rs 204,669 crore, y-o-y growth of 38.08% Advances up by Rs 126,231 crore, y-o-y growth of 29.89%Large corporate book up by 47%, Mid corporate by 23%, SME by 26% and International advances up by 54% y-o-y Became the single largest retail lender in India: Education Loan up by 50%, Auto loans up by 36%, Housing loan portfolio up by 21%; Nearly 800 new branches added during the year; branch network crosses 11,500, including 92 offices overseas NPAs remain under controlGross NPAs down from 3.04% to 2.84%; Net NPAs down from 1.78% to 1.76 Awards and recognition: During the past 12 months, the Bank has won a number of awards Only Indian bank to find a place in the Fortune Global 500 list Up from 495 last year to 380 this year (+115) seventh highest gainer.

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 Moved up in rankings from 219th spot last year to 150th spot this year in the Forbes 2000 list of largest companies in the world. Best Executive award to the Chairman by Asia Money. Only Indian bank among the top 100 banks in the world. Ranked 8th in top 25 banks in Asia Ranking in the banker top 1000 world banks improved to 57 from 70 as compared to the ranking of 2007; Awards by The Banker Magazine for Retail Core Banking and Overall Retail Technology Product. SBI is the only Indian bank to receive these awards. Awarded the Bank of the Year 2008 India by The Banker Magazine, London Selected to receive the Most Admired Infrastructure Financier Award at the KPMG Infrastructure Today Awards 08

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PURPOSE & SCOPE OF STUDY

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Purpose of study
To understand SME financing by State Bank of India The project involves study of loan proposal processing in SME segment. It involves a thorough assessment of various parameters before approval of any loan or advance. To understand various kind of financing arrangement for both project financing and working capital requirement. To understand various parameters used in credit risk assessment and the procedure of credit risk assessment in SME department in State Bank of India.

METHODOLOGY
To fulfill the objectives of my study, I have taken both into considerations viz primary & secondary data.

Primary data: Primary data has been collected through personal

interview by direct contact method. The method which was adopted to collect the information is Personal Interview method. Personal interview and discussion was made with manager and other personnel in the organization for this purpose.

Secondary data: The data is collected from the Magazines, Annual

reports, Internet, Text books.
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The various sources that were used for the collection of secondary data are o Internal files & materials o Websites Various sites like www.rbi.org.in www.indiainfoline.com www.sbi.co.in www.investopedia.com www.Wikepedia.com

SMALL and MEDIUM ENTERPRISES Small and Medium Enterprises (SME) comprises of small enterprises, medium enterprises and small & medium enterprises Small Enterprise (SE): A business enterprise with an annual turnover upto Rs. 5 crores. Medium Enterprise (ME): A business enterprise with an annual turnover above Rs. 5 crores, but less than Rs. 50 crores. Small & Medium Enterprise (SME): A business with annual turnover of less than Rs. 50 crores and would include SSIs, SBFs, Corporates / Non-Corporates, falling within this turnover. Under the MSME Act, two categories of enterprises have been defined Industrial Enterprises and Service Enterprises.

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This classification is summarized below: Classification Original Investment in Plant & Machinery Industrial Enterprises Up to Rs. 25 lacs > Rs. 25 lacs & up to Rs. 5 crores > Rs. 5 crores & up to Rs. 10 crores Original Investment in Equipment Service Enterprises Up to Rs. 10 lacs

Micro

Small

> Rs. 10 lacs & up to Rs. 2 crores

Medium

> Rs. 2 crores & up to Rs. 5 crores

WHAT CONSTITUTES THE SME SECTOR? In the given scenario, it can be broadly said that the SME Segment would include the following:

INDIVIDUALS

INDIVIDUALS AS BUSINESSMEN PROFESSIONA LS

PARTNERS HIP & FAMILY OWNED BUSINESS

SMALL & MEDIUM SIZED COMPANIES

LARGE CORPORAT E

CORPORATE GIANTS/PSU s

Retail Segment Segment

SME Segment (Constitution wise)

Wholesale/ Corporate Segment

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VARIOUS TYPES OF SMEs: SSIs AIUs TINY EOUs SSSEs SSSSBEs MEs Small Scale Industries Ancillary Industrial Undertakings Tiny Enterprises Export Oriented Units Small Scale Services Enterprises Small Scale Services Business Enterprises Medium Enterprises

1.

Small Scale & Ancillary Industries:

SSI units are those engaged in manufacture, processing or preservation of goods whose investment in Plant and Machinery (original cost excluding land and building etc.) does not exceed Rs. 5 crore. Beyond investment limit of Rs. 5 crore, the units will be categorized as C&I. 2. Small Business Finance :

All services Enterprises whose investment in equipment (original cost excluding land & building, furniture, fittings etc.) does not exceed Rs. 2.00 crores Beyond cut off investment limit of Rs. 2.00 crores as above, all services enterprises would be categorized under C&I units. 3. Tiny Enterprises:

Tiny Enterprises are small scale units whose investment in plant & machinery is upto Rs. 25 lacs, irrespective of the location of the units. 4. Small Scale Service & Business Enterprises (SSSBEs):
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Industry related service and business enterprises with investment upto Rs. 10 lacs in fixed asset, excluding land and building will be given benefits of Small Scale Sector. Example: Advertising Agency, Photocopying Centre, Industrial Photography, Interest Browsing, Cyber Cafe, Auto repair, Services & Garages. 5. Indirect finance in Small Scale industries sector will include credit to : Agencies involved in assisting decentralized sector in supply of imports and marketing of output of artisans, village and cottage industries. Govt. sponsored Corporation/ Organizations providing funds to weaker sections in priority sector. Advances to handloom Co-operatives.

Term finance/ loans in the form of lines of credit made available to State Industrial development Corporation for financing SSIs. Credit provided by banks to SIDBI/ SFCs by way of rediscounting of bills of SSIs which are originally discounted by a commercial bank and rediscounted by SIDBI/ SFCs will be indirect finance to SSIs. Banks to ensure: 40% of total credit to SSI goes to cottage industry, Khadi & Village industry, artisans and tint industries (with investment in Plant & machinery upto Rs. 5 lacs). 20% of total credit to SSI goes to SSI units with investment in P&M between Rs. 5 lacs to Rs. 25 lacs. Remaining 40% goes to SSI units with investment exceeding Rs. 25 lacs.
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Small and Medium Enterprises in India It is a veritable race to the bottom of the pyramid. Just a decade ago, banks on an aggressive growth path used to eliminate small &medium enterprises (SMEs) from their portfolio. Then, economic and corporate reform, falling interest rate and a booming capital market changed the game. The best companies aimed for global competitiveness, restructured operations, cut costs, reduced borrowings and met funding needs from the capital market leaving banks to find new customers. SME is fast growing sector in the Indian Economy. This sector provides employment to over 42 million people. The MSME sector accounts for 45 per cent of the country's factory output and 40 per cent of exports. Every Bank has given highest importance to financing to SMEs in their strategic growth plan. It has become necessary to bring policy shift and create free market environment from regulations & interventions in economic activity. Growth resulting from globalization and liberalization are visible most profoundly in the SME segment. The relationship between the banker and the customer has become most crucial and competitive. The technology has entered the scene almost as a natural corollary of liberalization. Liberalized policies provide ample opportunities to Indian Market to compete with developed and developing countries. Objectives It can be observed that by and large, SMEs in India met expectations of the Government in this respect. SMEs developed in a manner, which made it possible for them to, achieve the following objectives: High contribution to domestic production Significant export earning Operational flexibility Location wise mobility Capacities to develop appropriate indigenous technology
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Import substitution Characteristics of SMEs (1) (2) (3) (4) (5) (6) (7) (8) Concentration of functions in one/two persons Relatively low level of investments, production, sales etc Lack of professionalism Low efficiency in business operations Inadequate R&D Infrastructural inadequacies Limited market access Inadequate exposure to international environment

Changing Paradigm SSIs to SME Enterprises with single Entrepreneurs are being replaced by group of skilled professionals who display complementary skill sets, high standards of management and value delivery. Domestic projects are being benchmarked to global markets / technology. Number of organized / corporate entities under SME segment is growing rapidly and access to Capital Market products is increasing for funding expansion, modernization and diversification. Role of SME Sector and their Requirements SMEs are the driving force behind the economic growth of many economies around the world. More than 90% of all enterprises in the world are SMEs which generate 60 - 80% of total employment opportunities. During the present global financial crisis and the recessionary trend in developed and developing countries, it is of utmost importance to educate, nurture, guide and assist the SMEs in all possible ways including finance and marketing to ensure their growth.
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Introduction of new products in the market requires a strong product development base. India has limited capabilities in the area of 'Product design & development'. Most of the clusters and the SME units work on the designs or samples given to them by the domestic or foreign buyers. Broadly, there seems to be little innovation in product design and new product development in the clusters. However, in most countries, the availability of the technology & innovation is limited and not accessible to small entrepreneurs. Moreover, SMEs need more innovative solutions, latest technology, testing laboratories, finance for technology up gradation and a platform to understand and acquire the required knowledge. Challenges faced by SMEs: Inadequate access to finance due to lack of financial information and non-formal business practice. SMEs lack access to private equity and venture capital and have very limited access to secondary market instruments. SMEs face fragmented markets in respects of their inputs as well as products and are vulnerable to market fluctuations. SMEs lack easy access to inter-state and international markets.

The access of SMEs to technology and product innovations is also limited. There is lack of global best practices. SMEs face considerable delays in the settlement of dues/payment of bills by large scale buyers. With the deregulation of financial sector, the ability of the banks to service the credit requirements of the SME sector depends on the underlying transaction costs, efficient recovery processes and available security.

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Measures to increase quantum of credit to SMEs: Public Sector Banks to fix targets to achieve minimum 20% Y O Y growth in credit to SMEs to ensure doubling of finance to SME in five years period from 2004-05 to 2009-10. Commercial banks (including RRBs) with over 67600 branches to provide credit to at least 5 new tiny SME units at their Semi-urban/Urban branches per year. Under Credit Guarantee Fund Trust Scheme for Small Industries (CGTSI) banks are provided guarantee cover of 75% of the amount of default in respect of Term loan and /or Working Capital Loan up to Rs.50 lacs (SSI), Rs.25 lacs (trade & services). One time Guarantee Fee 1.5% of Credit facility is payable and Annual Service fee of 75% of credit payable annually. Cluster based approach for financing SMEs. Benefits: Reduction of transaction of transaction cost. Mitigation of risk.

Opportunities for SMEs: With a fast growing economy and vast opportunities, SMEs are poised to raise the bar and challenge international competition. Many SMEs will grow and challenge the larger industries in terms of growth as well as manufacturing excellence. The SME sector in SBI contributes largely towards the overall development of the Bank. State Bank of India has been playing a vital role in the development of small scale industries since 1956.The Bank has financed over 8 lacs SSI units in the country. It has 55 specialized SSI branches, 99 branches in industrial estates and more than 400 branches with SIB divisions. The Bank finances for Small Business activities which are of special significance to a large number of people as many of these activities can be started with
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relatively lower investment and with no special skills on the part of the entrepreneurs. SME Not just Manufacturing Sector includes Trade & Services Sector. SME SBU focuses on the whole gamut of Commercial Advances not covered by CAG & MCG. SBIs market share in financing SSI - 30%. SBIs market share in financing T&S 11%. Services Sector The new Engine of Growth.

Services Segment Focus Areas: Education Healthcare Tourism Construction IT / IT Enabled Services Media Entertainment Manufacturing Segment Sectors growing fast: Auto Components Textiles Pharmaceutical Engineering Chemicals

2 main trends are observed Ancillarisation & Export Orientation.

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 Small / Medium Vendors have adapted themselves to the needs of large local manufacturers. They are also becoming suppliers to Global Manufacturers.

Todays SMEs are acquiring companies abroad, are becoming part and parcel of Global Supply Chain, even convincing foreign manufacturers to outsource patented design work to them.

S.NO year

total MSME'S (In lacks)

Fixed investment (in R.s crores) 162317 (5.16) 170219 (4.87) 178699 (4.98) 188113 (5.27) 213219 (8.68 238975 (12.08)

Production current constant prices prices 314850 (11.54) 364547 (15.78) 429796 (17.9) 497886 (15.83) 585112 (17.53) 695126 (18.8) 306771 (8.68) 336344 (9.64) 372938 (10.88) 418884 (12.32) 471663 (12.6) 532979 (13)

Employment exports (R.s (in lacs) crores) 260.21 (4.36) 271 (4.36) 282.57 (4.11) 299.85 (4.44) 312.52 (4.23) 86013 (20.73) 97644 (13.52) 124417 (27.42) 150242 (20.76) 177660 (24.54)

20021 03 20032 04 20043 05 20054 06 20065 07 20076 08

109.49 (4.07) 113.95 (4.07) 118.59 (4.07) 123.42 (4.07) 128.44 (4.07) 133.68 (4.08)

322.28 N.A (3.12)

(The figure shows the growth from the previous year)

The above figures are given at 2002-03 prices except the constant prices for production which are given at 1992-93 prices.

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Graph 1: shows the growth total number of MSME unit in different years

Graph 2: shows the aggeregate production of MSME unit .

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Graph 3: shows fixed investment of MSME units.

Comparison of SME sector with overall industrial sector year Growth rate MSME sector 8.68 9.64 10.88 12.32 12.60 13 Overall industrial growth 5.7 6.9 8.4 8.1 11.5 8

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

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Contribution of MSME in GDP: (Contribution of MSME as a percentage) Year 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 In industrial production 39.12 38.89 38.74 38.62 38.56 38.57 In GDP 5.77 5.91 5.79 5.84 5.83 5.94

Opportunities for State Bank of India SME financing Better spreads on interest / bundling of services for enhanced yield in relationship. Risk is wide-spread.

Banks are now better equipped to handle the varied needs of the SME Sector due to better technology and Risk Management.

Vast scope for spin-off of ancillary business. Fewer complexities in extending finance.

All branches can handle the business - Limited specialization involved.

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BANK APPROACH FOR FINANCING: Pre- sanction Process 1. Application by the Company: 2. Verification of the Documents: 3. Assessment: The assessment is based on three steps Ratio Analysis Risk assessment Preparation of executive summary(proposal) 4. Preparation of Appraisal: Here two parameters are taken into account- Promoter Contribution and Security. 5. Sanction Committee Assessment

In the application for fund requirement the respective authority of the company approaches the bank for the loan and specifies the loan amount with some initial details of the company as well as the borrower. For this SBI has a particular format which is given to the borrower. The bank officials take utmost care of in verifying the details of the borrower to assess their integrity, faithfulness and trustworthiness. In order to verify certain basic documents are to be submitted to the bank (e.g. Photo Identity proof, Income tax return, trade license, authentication of the place of unit, etc). Apart from this the bank also checks with organizations like CIBIL (which maintains a defaulters list) to know whether the borrower companys name exist there or not. The borrower then gradually submits their project proposal with detail information and their financials. After thorough search the bank proceeds further and with repetitive meetings with the borrower the bank further clears about the margin
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amount to be provided by the borrower and the securities. The bank again involves some scrutinizing authorities to verify the validity of the securities provided by the borrower. While searching they mainly look for the valuation of the securities, whether they are mortgaged somewhere else or not, etc. Then the bank prepares a CMA (Credit Monitoring Assessment) sheet with the help of the financials provided by the borrower and by comparing their standards with the concerned industry standard. CMA is software which itself runs the ratio analysis once provided with some basic information. SBI has different formats of the CMA which are used for the ratio analysis assessment. Since CMA sheet is highly confidential document of the bank so a copy of the sheet could not be provided in this project. For ratio analysis assessment certain particular ratios are calculated to judge the companys position and to compare it with the present market scenario. By preparing the Credit Monitoring Assessment (CMA) sheet the bank analyses the balance sheet of the company and other financials. The CMA Sheet mainly constitutes of six parts analysis of the profit and loss account, the assessment of working capital requirement, balance sheet, the debt service coverage ratio and break even analysis, comparative statement of current assets and liabilities, The computation of maximum permissible bank finance and the funds flow statement. From the CMA sheet the bank may get information about the assets and liability status of the borrower, whether diversion of funds is taking place or not.

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After this comes the most important part: risk assessment. The process of assessment of risk is completed in two steps: Risk identification Risk mitigation. If the risk is considered to be bankable risk then only fund is provided to the party. State Bank of India follows a particular format for assessing these risk factors. The CRA (Credit Risk Assessment) model is divided into two parts: Simplified model(Rs.25 lakhs- 5 cr) Regular model( > Rs.5 cr) In case of both the models borrower rating is done for assessing financial risk, business risk and management risk. In case of regular model facility rating is added along with borrower rating. Facility rating is done on the basis of working capital loan term loan and Non fund based loan. After completing the risk assessment the scores are taken into consideration for gradation. Presently there are 16 grades (SB1 SB 16) which are followed by the bank.SB 10 is the hurdle grade which is the benchmark set by the bank. The interest rate is decided on the basis of this gradation. After the summation of the scores of the different parameters of risk assessment the grades are specified. The more the grade is towards SB1 less is the interest rate for the borrower. In case the loan amount is less than Rs.25 lakhs, the bank does not prepare any CRA for this. These loans are fitted into the schemes present in the bank.

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Banks are expanding their operation around the world; they are entering new markets; they are trading new asset types; and they are structuring exotic products. These changes have created new opportunities along with new risks. While banking is always evolving, the current fast rate of change is making it a challenge to respond to all the new opportunities. Changes in banking have brought both good and bad news. The bad news includes the very frequent and extreme banking debacles. In addition, there has been a divergence between international and domestic regulation as well as between regulatory capital and economic capital. More subtly, banks have wasted many valuable resources correcting problems and repairing outdated models and methodologies. The good news is that the banks which are responding to the changes have been rewarded with a competitive advantage. One response is the investment in risk management. While risk management is not new, not even in banking, the current rendition of risk management is new. Risk management takes a firm wide view of the institutions risks, profits, and opportunities so that it may ensure optimal operation of the various business units. The risk manager has the advantage of knowing all the firms risks extending across accounting books, business units, product types, and counterparties. By aggregating the risks, the risk manager is in the unique position of ensuring that the firm may benefit from diversification. Risk management is a complicated, multifaceted profession requiring diverse experience and problem-solving skills. The risk manager is constantly taking on new challenges. Whereas yesterday a risk manager may have been satisfied with being able to report the risk and return characteristics of his firms various business units, today he or she is using that information to improve his firms business opportunities. Credit risk is traditionally the main risk of banks. Banks are in the business of taking credit risk in exchange for a certain return above
36

the riskless rate. As one would expect, banks deal in the greatest number of markets and types of products. Banks above all other institutions, including corporations, insurance companies, and asset managers, face the greatest challenges in managing their credit risk. One of the credit risk managers' tools is the credit risk assessment (CRA) model.

In State Bank of India (SBI), I have acquired knowledge about the position that credit risk management has in the entire credit appraisal system of the bank. Credit risk assessment plays a vital role in the way banks perform, viz.; it reflects the profitability, liquidity, and reduced NonPerforming Assets. The goal of credit risk management is to maximise a banks risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to deal with the credit risk inherent in the entire portfolio as well as the risk in individual credit transactions. So, we can find that credit risk assessment forms one of the most important parts in the credit appraisal system of any banking institution. There is an inherent element of risk in the banks lending business since the funds disbursed to a borrower today is required to be recovered by the bank in the future along with interest. This is broadly named as Credit risk. Credit risk assessment focuses on the area of reducing the credit risk and thus, increasing the value of the shareholders. The process of liberalization of the economy, which was initiated in the late 80s in response to global forces gained momentum after balance of payment crisis in 1991.The success of economic reforms, necessitated an efficient and viable financial system. To invigorate the financial sector and to prepare it to take up the challenge of globalisation of the economy, recommendations of Narsimham Committee (1991) were implemented in a phased manner and the ground was prepared to bring the Indian financial markets at par with
37

international standards. In the last couple of years, the forces of change in the Indian financial sector has gathered momentum and changing its shape at an alarming speed. Easing of restrictions coupled with increasing penetration of the latest technology has unleashed competitive forces in the Indian financial sector. The definition of banking sector which is one of the important segments of financial sector has also expanded gradually with inclusion of leasing and hire purchase services, factoring, capital market services, depository, bullion business, and now insurance. All these have changed the paradigm in the Indian banking with emergence of a new set of rules of the game. The challenges and pressures of the new found environment have been intense. Risk Management, Asset Liability Management, Innovation, Relationship Banking and Environment Management have become integral to today's banking. These changes and challenges require a totally new set of skills for competing in the future.

The major forces of change in Indian financial sector include: Globalisation of commerce Emergence of various environment Technological revolution Increased competition Infrastructural improvements in capital markets types of risks in deregulated

THEORETICAL BACKGROUND OF CREDIT RISK MANAGEMENT

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CREDIT: The word credit comes from the Latin word credere, meaning trust. When sellers transfer his wealth to a buyer who has agreed to pay later, there is a clear implication of trust that the payment will be made at the agreed date. The credit period and the amount of credit depend upon the degree of trust.

Credit is an essential marketing tool. It bears a cost, the cost of the seller having to borrow until the customers payment arrives. Ideally, that cost is the price but, as most customers pay later than agreed, the extra unplanned cost erodes the planned net profit.

RISK: Risk is defined as uncertain resulting in adverse outcome, adverse in relation to planned objective or expectation. It is very difficult o find a risk free investment. An important input to risk management is risk assessment. Many public bodies such as advisory committees concerned with risk management. There are mainly three types of risk they are follows Market risk Credit Risk Operational risk Risk analysis and allocation is central to the design of any project finance, risk management is of paramount concern.
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Thus quantifying risk along with profit projections is usually the first step in gauging the feasibility of the project. Once risks have been identified they can be allocated to participants and appropriate mechanisms put in place.

Types of Financial Risks

Market Risk Financial Risks Operational Risk Credit Risk

MARKET RISK: Market risk is the risk of adverse deviation of the mark to market value of the trading portfolio, due to market movement, during the period required to liquidate the transactions.

OPERTIONAL RISK: Operational risk is one area of risk that is faced by all organization s. More complex the organization more exposed it would be operational risk. This risk arises due to deviation from normal and planned functioning of the system procedures, technology and human failure of omission and commission. Result of deviation from normal functioning
40

is reflected in the revenue of the organization, either by the way of additional expenses or by way of loss of opportunity.

CREDIT RISK: Credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms, or in other words it is defined as the risk that a firms customer and the parties to which it has lent money will fail to make promised payments is known as credit risk

The exposure to the credit risks large in case of financial institutions, such commercial banks when firms borrow money they in turn expose lenders to credit risk, the risk that the firm will default on its promised payments. As a consequence, borrowing exposes the firm owners to the risk that firm will be unable to pay its debt and thus be forced to bankruptcy. CONTRIBUTORS OF CREDIT RISK: Corporate assets Retail assets Non-SLR portfolio May result from trading and banking book Inter bank transactions Derivatives Settlement, etc
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KEY ELEMENTS OF CREDIT RISK MANAGEMENT: Maintaining an appropriate credit administration, measurement & Monitoring Ensuring adequate control over credit risk Operating under sound credit granting process Banks should have a credit risk strategy which in our case is communicated throughout the organization through credit policy.

Two fundamental approaches to credit risk management: The internally oriented approach centers on estimating both the expected cost and volatility of future credit losses based on the firms best assessment. Future credit losses on a given loan are the product of the probability that the borrower will default and the portion of the amount lent which will be lost in the event of default. The portion which will be lost in the event of default is dependent not just on the borrower but on the type of loan (e.g. some bonds have greater rights of seniority than others in the event of default and will receive payment before the more junior bonds).

To the extent that losses are predictable, expected losses should be factored into product prices and covered as a normal and recurring cost of doing business. i.e., they should be direct charges to the loan valuation. Volatility of loss rates around expected levels must be covered through risk-adjusted returns.

42

So total charge for credit losses on a single loan can be represented by

([expected probability of default] * [expected percentage loss in event of default]) + Risk adjustment * the volatility of ([probability of default * percentage loss in the event of default]).

Financial institutions are just beginning to realize the benefits of credit risk management models. These models are designed to help the risk manager to project risk, ensure profitability, and reveal new business opportunities. The model surveys the current state of the art in credit risk management. It modeling. This also describes what a credit risk management model should do, and it analyses some of the popular models.

The success of credit risk management models depends on sound design, intelligent implementation, and responsible application of the model. While there has been significant progress in credit risk management models, the industry must continue to advance the state of the art. So far the most successful models have been custom designed to solve the specific problems of particular institutions. A credit risk management model tells the credit risk manager how to allocate scarce credit risk capital to various businesses so as to optimize the risk and return characteristics of the firm. It is important or understand that optimize does not mean minimize risk otherwise every firm would simply invest its capital in risk less
43

assets. A credit risk management model works by comparing the risk and return characteristics between individual assets or businesses. One function is to quantify the diversification of risks. Being well-diversified means that the firms have no concentrations of risk to say, one geographical location or one counterparty.

Steps to follow to minimize different type of risks:-

Standardized Internal Ratings Credit Risk Credit Risk Models Credit Mitigation Trading Book Risks Market Risk Banking Book

Operational Other Risks Other There

CREDIT RATING

Definition:Credit rating is the process of assigning a letter rating to borrower indicating that creditworthiness of the borrower.

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Rating is assigned based on the ability of the borrower (company) to repay the debt and his willingness to do so. The higher rating of company the lower is the probability of its default.

Use in decision making:Credit rating helps the bank in making several key decisions regarding credit including: 1. Whether to lend to a particular borrower or not; what price to charge? 2. What are the products to be offered to the borrower and for what tenure? 3. At what level should sanctioning be done, it should however be noted that credit rating is one of inputs used in credit decisions. There are various factors (adequacy of borrowers, cash flow, collateral provided, and relationship with the borrower) Probability of the borrowers default based on past data. Main features of the rating tool: comprehensive coverage of parameters extensive data requirement mix of subjective and objective parameters includes trend analysis 13 parameters are benchmarked against other players in the segment captions of industry outlook
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 8 grade ratings broadly mapped with external rating agencies prevailing data.

Rating tool for SME:Internal credit ratings are the summary indicators of risk for the banks individual credit exposures. It plays a crucial role in credit risk management architecture of any bank and forms the cornerstone of approval process. Based on the guidelines provided by Boston Consultancy Group (BCG), SBI adopted credit rating tool. The rating tool for SME borrower assigns the following Weight ages to each one of the four main categories i.e. (I) Scenario (1st) without monitoring tool S No Parameters 1 2 3 4 financial performance operating performance quality of management industry outlook Weightages() XXXX XXXX XXXX XXXX

(ii). Scenario (II) with monitoring tool [conduct of account]:- the weight age would be conveyed separately on roll out of the tool. In the above parameters first three parameters used to know the borrower characteristics. In fourth encapsulates the risk emanating
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from the environment in which the borrower operates and depends on the past performance of the industry its future outlook and macro economic factors. Financial performance:S No Sub parameters Weightages (in %) 1 2. 3. 4. 5. 6. 7. 8. 9. Net sales growth rate (%) PBDIT Growth rate (%) PBDIT /Sales (%) TOL/TNW Current ratio Operating cash flow DSCR Foreign exchange ratio Expected values of D/E of 50% of NFB credit devolves 10. 11. 12. Reliability of Debtors State of export country economy Fund deputation risk Total Xxxx Xxxx Xxxx Xxxxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx

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Operating performance S No Sub parameters Weight age (%) 1. 2. 3. 4. 5. 6. 7. 8. 9. credit period allowed credit period availed working capital cycle Tax incentives production related risk product related risk price related risk client risk fixed asset turnover Total Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xxxxxx

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Quality of management S No sub parameters Weightages (%) 1. 2 3 4 HR Policy / Track record of industrial unrest market report of management reputation history of FERA violation / ED enquiry Too optimistic projections of sales and other financials 5 6 technical and managerial expertise capability to raise money Total Xxxx Xxxx Xxxxxx Xxxx Xxxx Xxxx Xxxx

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IN STATE BANK OF INDIA DFFERENT PARAMETERS USEDTO GIVE RATINGS ARE AS FOLOWS:FINANCIAL PARAMETERS S.NO F1(a) F2(b) F1(c) F1(d) F1(e) F2 F3 F4 F5 F6 F7 F8 F9 F10 F11 Indicator/ratio Audited net sales in last year Audited net sales in year before last Audited net sales in 2 year before last Audited net sales in 3 year before last Estimated or projected net sales in next year NET SALES GROWTH RATE (%) PBDIT growth rate (%) Net sales (%) ROCE (%) TOL/TNW Current ratio DSCR Interest coverage ratio Foreign exchange risk Reliability of debtors Score Xxxx Xxxx Xxxx Xxxx Xxxx Xxxx Xx Xx Xx Xxx Xxx Xxx Xx Xx Xx

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F12 F13

Operating cash flow Trend in cash accruals

Xx x

BUSINESS PARAMETERS S.NO B1 B2 B3 B4 B5 B6 B7 B8 B9 Indicator/ratio Credit period allowed(days) Credit period availed(days) Working capital cycle(times) Production related risks Product related risks Price related risks Fixed assets turnover No. of years in business Nature of clientele base Score Xx Xx Xx Xx X X X X X

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MANAGEMENT PARAMETERS SR. NO M1 M2 M3 M4 HR policy Track record in payment of statutory and other dues Market report of management reputation Too optimistic projections of sales and other financials M5 M6 M7 Capability to raise resources Technical and managerial expertise Repayment track record X X X X X X X INDICATOR/RATIO SCORE

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CONDUCT PARAMETERS A1 A2 Creation of charges on primary security Creation of charges on collateral and execution of personal or corporate guarantee A3 A4 A5 A6 A7 B1 Proper execution of documents Availability of search report Other terms and conditions not complied with Receipt of periodical data Receipt of balance sheet Negative deviation in half yearly net sales vis--vis proportionate estimates B2 Negative deviation in annual net sales vis--vis estimates B3 Negative deviation in half yearly net profit vis--vis proportionate estimates B4 Adverse deviation in inventory level in months vis--vis estimate level B5 B6 Quality of receivable assess from profile of debtors Adverse deviation in creditors level in months vis--vis estimated level B7 Compliance of financial covenants
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X X

X X X X X X

X X

B8

Negative deviation in annual net profit vis--vis estimates Unit inspection report observations

X X X

C2 C3

Audit report internal/statutory/concurrent/RBI Conduct of account with other banks/lenders and information on consortium

D1 D2 D3

Routing of proportionate turnover/business Utilization of facilities(not applicable for term loan) Overdue discounted bills during the period under review within the sanctioned terms then not applicable

X X X

D4

Devolved bill under L/c outstanding during the period under review

D5

Invoked BGs issued outstanding during the period under review

D6

Intergroup transfers not backed by trade transactions during the period under review

D7

Frequency of return of cheques per quarter deposited by X borrower

D8

Frequency of issuing cheques per quarter without sufficient balance and returned

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D9 D10

Payment of interest or installments Frequency of request for AD HOC INCREASE OF LIMIS during the last one year

X X

D11

Frequency of over drawings CC account

E1

Status of deterioration in value of primary security or X stock depletion

E2 E3 E4

Status of deterioration in value of collateral security Status of deterioration in personal net worth and TNW

X X

Adequacy of insurance for the primary /collateral X security

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F1 F2

Labor situation/industrial relations

Delay or default in payments of salaries and statutory X dues

F3 F4 F5

Non co-operation by the borrower Intended end-use of financing

X X

Any other adverse features non financial including X corporate governance issues such as adverse publicity, strictures from regulators, political risk and adverse trade environment not covered

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Difficulty of measuring credit risk:Measuring credit risk on a portfolio basis is difficult. Banks and financial institutions traditionally measure credit exposures by obligor and industry. They have only recently attempted to define risk quantitatively in a portfolio context e.g., a value-at-risk (VaR) framework. Although banks and financial institutions have begun to develop internally, or purchase, systems that measure VaR for credit, bank managements do not yet have confidence in the risk measures the systems produce. In particular, measured risk levels depend heavily on underlying assumptions and risk managers often do not have great confidence in those parameters. Since credit derivatives exist principally to allow for the effective transfer of credit risk, the difficulty in measuring credit risk and the absence of confidence in the result of risk measurement have appropriately made banks cautious About the use of banks and financial institutions internal credit risk models for regulatory capital purposes. Measurement difficulties explain why banks and financial

institutions have not, until very recently, tried to implement measures to calculate Value-at-Risk (VaR) for credit. The VaR concept, used extensively for market risk, has become so well accepted that banks and financial institutions supervisors allow such measures to determine capital requirements for trading portfolios. The models created to measure credit risk are new, and have yet to face the test of an economic downturn. Results of different credit risk models, using the same data, can widely. Until banks have greater confidence in
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parameter inputs used to measure the credit risk in their portfolios. They will, and should, exercise caution in using credit derivatives to manage risk on a portfolio basis. Such Models can only complement, but not replace, the sound judgment of seasoned credit risk managers. APPRAISAL OF THE FIRMS POSITION ON BASIS OF FOLLOWING OTHER PARAMETERS 1. Managerial Competence 2. Technical Feasibility 3. Commercial viability 4. Financial Viability

Managerial Competence: Back ground of promoters Experience Technical skills, Integrity & Honesty Level of interest / commitment in project Associate concerns

Technical Feasibility: Location Size of the Project Factory building Plant & Machinery Process & Technology
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 Inputs / utilities

. Commercial Viability: Demand forecasting / Analysis Market survey Pricing policies Competition Export policies

Financial Viability: Whether adequate funds are available at affordable cost to implement the project Whether sufficient profits will be available Whether BEP or margin of safety are satisfactory What will be the overall financial position of the borrower in coming years?

Credit investigation report Branch prepares Credit investigation report in order to avoid consequence in later stage. Credit investigation report should be a part of credit proposal. Bank has to submit the duly completed credit investigation reports after conducting a detailed credit investigation as per guidelines Some of the guidelines in this regards as follow

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 Wherever a proposal is to be considered based only on merits of flagships concerns of the group, then such support should also be compiled in respect of subject flagship in concern besides the applicant company. In regard of proposals falling beyond the power of rating officer, the branch should ensure participation of rating officer in compilation of this report. The credit investigation report should accompany all the proposals with the fund based limit of above 25 Lakhs and or non fund based of above Rs. 50 Lakhs. The party may be suitably kept informed that the compilation of this report is one of the requirements in the connection with the processing for consideration of the proposal. The branch should obtain a copy of latest sanction letter by existing banker or the financial institution to the party and terms and conditions of the sanction should study in detail. Comments should be made wherever necessary, after making the observations/lapses in the following terms of sanction. Some of the important factors like funding of interest reschedule of loans etc terms and conditions should be highlighted. Copy of statement of accounts for the latest 6 months period should be obtained by the bank. To get the present condition of the party. Remarks should be made by the bank on adverse features observed. (e.g., excess drawings, return of cheques etc).

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 Personal enquiry should be made by the bank official with responsible official of partys present / other bankers and enquiries should be made with a elicit information on conduct of account etc. Care should be taken in selection of customers or creditors who acts as the representative. They should be interviewed and compilation of opinion should be done. Enquiries should be made regarding the quality of product, payment terms, and period of overdue which should be mentioned clearly in the report. Enquiry should be aimed to ascertain the status of trading of the applicant and to know their capability to meet their commitments in time. To know the market trend branch should enquire the person or industry that is in the same line of business activity. In depth observation may be made of the applicant as to : i. ii. iii. iv. v. vi. vii. whether the unit is working in full swing number of shifts and number of employees any obsolete stocks with the unit capacity of the unit nature and conditions of the machinery installed Information on power, water and pollution control etc. information on industrial relation and marketing strategy

CREDIT FILES:Its the file, which provides important source material for loan supervision in regard to information for internal review and external audit. Branch has to maintain separate credit file compulsorily in case
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of Loans exceeding Rs 50 Lakhs which should be maintained for quick access of the related information.

Contents of the credit file: basic information report on the borrower milestones of the borrowing unit competitive analysis of the borrower credit approval memorandum financial statement copy of sanction communication security documentation list Dossier of the sequence of events in the accounts Collateral valuation report Latest ledger page supervision report Half yearly credit reporting of the borrower Quarterly risk classification Press clippings and industrial analysis appearing in newspaper Minutes of latest consortium meeting Customer profitability Summary of inspection of audit observation

Credit files provide all information regarding present status of the loan account on basis of credit decision in the past. This file helps the credit officer to monitor the accounts and provides concise information regarding background and the current status of the account
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Post -sanction Process:

Follow up Supervision Monitoring and Control Follow up function covers tracking performance of the borrower, ensuring safety recover- ability of the advances. Supervision function should primarily ensure that effective follow up of advances is in place and asset quality of a good order is maintained. Supervisor should look out for early warning signals, identify incipient sickness and initiate proactive remedial action. Monitoring and control function ensures that effective supervision is maintained on advances and appropriate responses are initiated wherever early warning signals are seen. The function also tracks customer satisfaction and provides responses where necessary.

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DATA COLLECTION AND ANALYSIS

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An analysis of the following 20 schemes for SMES was done

S.No 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Scheme ARTISAN CREDIT CARD CAR LOAN FOR SME UNIT/PROMOTER Commodity Backed Financing of W/R Cyber Plus Scheme DHALL MILL PLUS Cyber Plus Scheme DAIRY CREDIT CARD SCHEME Doctor Plus Scheme INTERNET KIOSK Oil Plus RESTAURANTS RICE MILL PLUS SBI SHOPPE PLUS SBI Shoppe Scheme SME POWER GAIN CA-PG SME POWER GAIN CA-PP SME Petro Credit SME SMART SCORE (FRESH) SME SMART SCORE (RENEWAL) TRANSPORT PLUS

The total numbers of account were 83250 as on 30-june-2009 total outstanding amount was 7238.2 crore rupees total number of non performing account were 7520,total outstanding NPA amount was 301.16 crore rupees. The gross NPA was 4.08.

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Total advance given by SBI to SSI and SBF in Bengal circle at the end of last five financial years is given in the following table:

Date (as on ) 31st march 2005 31st march 2006 31st march 2007 31st march 2008 31st march 2009

Amount in crores. 1403 1870 2408 3209 4484

Total advance given by SBI in Bengal circle at the end of last five financial years is given in the following table:

Date (as on ) 31st march 2005 31st march 2006 31st march 2007 31st march 2008 31st march 2009

Amount in crores. 5666 7748 10051 13244 16837

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Total advance given by SBI to SSI and SBF units in all circles at the end of last five financial is given in the following table: Date (as on ) 31st march 2005 31st march 2006 31st march 2007 31st march 2008 31st march 2009 Amount in rupees crores. 23250 28545 34876 46568 53991

Total advances given by SBI in all circles at the end of last five financial is given in the following table:

Date (as on ) 31st march 2005 31st march 2006 31st march 2007 31st march 2008 31st march 2009

Amount in rupees crores. 211316 256069 337336 416768 542503

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Comparison of the percentage of total advance given by SBI to SSI and SBF in Bengal circle and in all circles: Date as on 31st march 2005 31st march 2006 31st march 2007 31st march 2008 Bengal circle 24.76% 24.13% 23.95% 24.22% All circle 11% 11.4% 10.335 11.17%

Graphical representation:

The advance given by SBI to SSI and SBF in Bengal circle is around 24% of the total advance given by it in Bengal circle. Whereas the advances given by SBI to SSI and SBF units in all circles is around 11% of the total advance given by SBI. One important point is to be noted that SBI and SBF units do not consist of all SME units. Some of SME units also come under C&me category which has not been considered as it was not easy to identify those units.
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The gross NPA of SBI in Bengal circle at the end of last five financial years is given in the following table: Date as on 31st march 2005 31st march 2006 31st march 2007 31st march 2008 31st march 2009 NPA (%) 8.16 5.38 4.32 4.86 5.83

The gross NPA of SBI at the end of each of last five financial years is given in the following table: Date as on 31st march 2005 31st march 2006 31st march 2007 31st march 2008 31st march 2009 NPA (%) 5.96 3.61 2.92 3.04 2.84

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Comparison of SBIS Gross NPA in Bengal circle and in all circles:

The gross NPA for SBI in all circles was 2.84 for the year ended on 31st march 2009. Gross NPA for SBI in Bengal circle was 5.83. The NPA for 20 schemes which were studied was 4.08 which was lower than the NPA for Bengal circle and was more than NPA of SBI in all circles.

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DISTRIBUTION OF OUTSTANDING ADVANCES OF PUBLIC SECTOR BANKS TO SMALL ENTERPRISES - 2008 (No. of Accounts in lakh and Amount in Rs. crore)
Manufacturing Enterprises No. of Accounts (1) State Bank of India Other subsidiaries State Bank Group Punjab National Bank Canara Bank Allahabad Bank United Bank of India Central Bank of India Bank of India Bank of Baroda Indian Bank UCO Bank other PSU banks 5.65 3.55 9.20 1.36 1.14 0.98 0.87 0.65 0.57 0.50 0.30 0.29 2.13 Amount outstanding (2) 22576 13575 36151 10179 9638 2619 1618 3455 9403 6906 2221 3787 28169 Service Enterprises No. of Accounts (3) 5.08 3.22 8.30 1.12 2.04 0.72 0.21 0.65 0.60 0.71 0.54 0.22 5.73 Amount outstanding (4) 5470 3188 8658 2086 4366 788 504 1213 2300 1446 907 648 9178 Advances to Khadi & village industries sector No. of Accounts (5) 0.42 0.19 0.61 0.12 0.02 0.10 0.01 0.07 0.02 0.05 0.01 0.05 0.31 1.37 Amount outstanding (6) 427 247 674 185 117 123 16 170 2193 121 23 240 2191 6053

Total 17.99 114146 20.84 32094 Source: Half yearly return on advances to priority sectors, Rural Planning and Credit Department, RBI.

SBI is the leading bank in distribution of advance to small enterprise the total number of account holders were 18.11 lakhs and the total outstanding amount was Rs. 45,483 crores. Distribution of all PSU banks: Total numbers of account holders were 40.2 lakhs. Total outstanding amount was Rs.152293. SBI accounts for 45% of the total account holders and 29.87% of the total outstanding advance.

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CONCLUSION AND RECOMMENDATION

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CONCLUSION:
Banks are making rapid growth by increasing their exposure. Along with more exposure to credit sanctioned comes more risk. So, in order to survive in this present scenario of tough competition, the banks have to adopt the best possible way to negate the possibility of a non-performing asset (NPA). Here comes the importance of credit risk management. Credit risk management is not an old concept in India as compared to the other foreign countries. With globalisation taking place, the Indian banking industry were not limited to the localised risks anymore. In order to achieve competitive advantage, the Indian banking industry had to adopt the latest techniques that were accepted globally. Credit risk management forms one of those areas which has been started to be recognised as the most essential one by the Indian banking industry. The project undertaken has helped a lot in gaining knowledge about the SBIS financing to SMEs and its credit Risk assessment process in State Bank of India. Credit Risk Policy of the Bank has become very vital in the smooth operation of the banking activities. Credit Policy of the Bank provides the framework to determine (a) Whether or not to extend credit to a customer and (b) How much credit to extend. The Project work has certainly enriched the knowledge about the effective assessment of loan proposal

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LIMITATIONS: Following limitations were encountered while preparing this project: 1) This project has completed with annual reports; it just constitutes one part of data collection i.e. secondary. There were limitations for primary data collection because of confidentiality. 2) This project is based on five year annual reports. Conclusions and recommendations are based on such limited data. The trend of last five year may or may not reflect the real working capital position of the company. 3) Also it was difficult to collect the data regarding the competitors and their financial information. Industry figures were also difficult to get.

RECOMMENDATIONS:
The Bank should keep on revising its Credit Policy which will help Banks effort to correct the course of the policies Credit risk is the main risk faced by the banking industry, a lot of work is being done by state bank of India to reduce the losses caused by credit risk. The information asymmetry is one of the root causes of commercial bank credit risk and is certainly a major cause. Credit risk means the possibility to make banks suffer a lot of losses because of the uncertainties in credit activities. So bank should make full efforts to reduce the information asymmetry. State Bank of India can tap the huge potential in SME financing. The following are the measures which need to be taken: With better risk management the probability of skewed returns from SMEs could be minimized.
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Eradicate inconsistency in the knowledge of SMEs business. For example, entrepreneurs may possess more information about the nature and characteristics of their products and processes than potential financiers. Improve the managerial and technical expertise of intermediaries whose role is to evaluate and monitor companies

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APPENDICES & ANNEXURE

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Various Schemes Provided By SBI: 1. Surabhi Deposit Scheme SBI- SURABHI DEPOSIT -A new Savings Bank / Current Account product, introduced by L&TP Department of SMEBU, launched at all the Core Banking Branches of the Bank to cover non-individual customers like Corporates, Institutions, Trusts, PF Funds etc who have surplus funds for investments, but at the same time need the convenience of liquidity. This is a value added savings Bank account (for those who are permitted to open SB account)/current account with sweep and reverse sweep option. Surplus funds over a threshold limit (Minimum Rs. 50,000/-) with an initial deposit of Rs.10,000/- and in multiples of Rs.1,000/- in any one instance, is automatically swept (auto-sweep)to CLTD (Corporate Liquid Term Deposit) Customer has the flexibility to choose the period of deposit from 1 year to 3 years. Rate of Interest for CLTD will be the card rate applicable for the contracted tenure of the deposit. No differential rate of interest is applicable. Minimum Amount of deposit to be maintained for Current Account is Rs.10,000/- and for SB account is Rs.1000/Whenever any cheque is presented by the customer, in case of inadequate balance in the savings / current account for payment of the cheque, the shortfall amount is broken in last in first out basis from
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the CLTD and the cheque is honored, without any hassle to the customer, through reverse sweep facility. At present this is available only for withdrawal through cheques, later the facility will be available for withdrawal through ATM cards also. No Loan /Overdraft Facility is available under the Scheme. Rules applicable for premature withdrawal for fixed deposit are applicable for the part amount of deposit broken for withdrawal, through reverse sweep. Usual formalities applicable for opening SB accounts/Current accounts, including KYC procedure, are applicable for opening accounts under the Scheme. 2. Commodity Backed Warehouse Receipt Financing Purpose: To finance traders/owners of goods against warehouse receipts of warehouses managed by Central Warehousing Corporations/ State Warehousing Corporation and warehouse accredited by MCX by way of Demand Loan/Cash Credit. Eligibility: Any trader dealing in commodities. Eligible Amount of Finance: Demand Loan: 75 % of the value of the warehouse receipt,
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valued at the market value OR 80% of the minimum support price declared by State/Central Government whichever is lower.

Cash Credit: 70 % of the value of the warehouse receipt, valued at the market value OR 75% of the minimum support price declared by State/Central Government, whichever is lower Processing charges: Cash Credit: Rs.300/- per lac for the facility sanctioned Demand Loan: Nil where loan is sanctioned and disbursed Rs. 300 per lac in case the loan is sanctioned but the borrower does not avail. Margin: o Demand Loan: 25% (minimum) of the value of the warehouse receipt, valued at the market value OR

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20% (minimum) of the minimum support price declared by State/Central Government, whichever is higher. o Cash Credit: 30% (minimum) of the value of the warehouse receipt, valued at the market value OR 25% (minimum) of the minimum support price declared by State/Central Government, whichever is higher Insurance: Comprehensive Insurance Insurance cost to be borne by the warehouse receipt owner. Security: Primary Charge over warehouse receipt (resulting in charge over underlying goods), with lien marked in favour of the bank. Collateral Personal guarantee of partners or directors as the case may be. Repayment: Demand Loan: The loan should be liquidated as and when the produce is sold during the interim period not exceeding 12 months.

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Cash Credit: Repayable on demand. To be brought to credit balance and DP made Nil/reduced when the quality certificate expires. Others: a) The Warehouse receipt should be duly marked lien in

favour of the bank b) The Branch should verify the authenticity of the

warehouse receipt and get its lien noted with the warehouse before disbursal of the demand loan/ CC facility. c) The margin shall be topped up on a fortnightly basis.

However, it should be topped up immediately in case the price of commodity moves by more than 10%, in opposite direction, since last top up. d) CC Limits and operating account will be different for

different commodities handled by the same trader/customer. Interchangeability in limits can be offered, if required.

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3. Traders Easy Loan Scheme This scheme is launched by SBI to provide hassle free loan to Traders. Any business man/ entrepreneur/ Professional and self employed person can avail this loan. Loan under the scheme can be availed to meet normal business requirements and is sanctioned against equitable mortgage of property. Any residential or commercial property in the name of unit/ proprietor/partner OR their close relatives is acceptable. Agriculture property or property outside urban limits is not accepted. The advance can be availed by way of Loan or Cash Credit limit. It can also be availed for Non Fund Based requirements (for issuance of Bank guarantees or LCs). Cash Credit limit or non fund based limit is renewable every 12 months. Loan can be repaid in monthly or quarterly, even half yearly installments - as may be suitable to the borrower in a period upto 5 years. Minimum and maximum amount of loan is Rs 25,000/- and Rs 5.00 Crore. Margin is 35%. i.e. loan can be upto 65% of the realizable value of the property or the business requirement- whichever is less. Business requirement is assessed on the basis of projected business turnover. Interest at floating rate is charged at monthly intervals on daily reducing balance. No Third party guarantee is required to avail the loan. 4. Small Scale Industry (SSI) Loan Schemes General Purpose Term Loans State Bank of India grants term loans to small scale industries for meeting general commercial purposes like substitution of high cost debt, research and development, shoring up net worth and funding business expansion. The tenor of the loan is normally is 3 years, and the pricing is fine-tuned to suit the risk profile of the borrower. The repayment is structured in monthly or quarterly installments, according to the cash generation cycle.

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Eligibility: The SSI unit that takes the loan should not have any history of defaults in payment of interest or installments of the principal. The unit should have a strong performance record and a respectable credit rating as per the banks own credit assessment scales (In case of loan above Rs. 25 lakhs). Security: Extension of hypothecation charge over the current assets and fixed assets is required as primary security. Further, the borrower whose aggregate loans with the Bank exceed Rs 5 lakh may explore the possibility of collateralizing tangible security such as immovable property and third party guarantee. In all cases, personal guarantees of proprietors/ partners/ promoters have to be furnished. Margins: A minimum margin of 25 per cent is applicable for acquisition of land and building, building construction, renovation of offices, showrooms, go downs, purchase of equipment, vehicles etc. In other words, the quantum of the loan will be restricted to 75 per cent of the total expenditure

Liberalized Credit For SSI State Bank of India extends production-linked credit facilities to small-scale industries, ancillary industrial units and village and cottage industrial units on liberal terms and conditions. Under this scheme, the quantum of advances is not linked to the security furnished, but the genuine requirements of the unit. The pricing of the loan is based on credit assessment, and the units with strong ratings may be given finer rates.

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No collateral security is required for loans up to Rs 5 lakh. Composite term loans can be sanctioned up to Rs 25 lakh combining term loan and working capital. Types of financial assistance The Liberalized scheme offers a range of financial products including the following: 1. Term loans for acquisition of fixed assets 2. Working capital loans financing current assets 3. Letter of credit for acquisition of machinery and purchase of raw materials 4. Bank guarantee in lieu of security deposits to be made with government department/other departments for execution of orders. 5. Deferred payment guarantees for purchase of machinery on deferred payment basis. 6. Bill facility for purchase of raw materials and for sale of finished goods. 7. Composite loans (term loans plus working capital) up to Rs 25 lakh. Margins For requirements up to Rs 25,000, no margins are involved. For limits ranging from Rs 25,000 to Rs 5 crore, the margin is set at 20 per cent. For credit limits above Rs 5 crore, a 25 per cent margin may be applied. Equity Fund Scheme Under the Equity Fund scheme, the SBI grants financial assistance to entrepreneurs who are not able to meet their share of equity fully, by way of interest-free loans repayable over a long period. This type of assistance fills in the gap between the margin requirements in the project and the capital contributed by the
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promoter. The Equity Fund assistance can be normally repaid over 5 to 7 years after the moratorium period. Eligibility: The bank extends Equity Fund assistance only to new projects, which are also eligible for the SBIs Liberalized scheme and the Entrepreneur scheme. The project cost has to be more than Rs 25,000. Security: Security available for other loans should be extended to cover equity assistance also. Open Term Loan Hassle free pre-approved line of credit Max Loan Amount: Rs. 250 lacs (for Manufacturing), Rs.100 lacs (for Trade and Services) Validity of sanction - 12 months Freedom to avail the facility at your own convenience, within the validity of sanction. Multiple disbursements allowed. No penalty on the unutilized amount (even if completely unutilized) The loan can be utilized for any genuine commercial purposes in line with the regular business activity of the customer. These would include term loans for: a. Expansion and modernization.

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b. Substitution of high cost debts / high cost term debts of other banks/FIs. c. Design and introduction of new layouts in the factory to enhance productivity. d. Up gradation of technology& energy conservation schemes/ machinery. e. Acquisition of software, hardware, consumable tools, jigs, fixtures etc. f. Acquisitions of ISO & other similar certifications. g. Visits abroad for acquiring technology, finalizing business deals, participating in exhibitions/ fairs for market promotion etc. Ideally SME units should apply for Open Term Loans along with their renewal requests for working capital facilities, so that the appraisal can be done simultaneously and line of credit made available for an entire year.

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BIBLIOGRAPHY 1.
www.sbitimes.com

2. www.google .com 3. www.sbi.co.in 4. Credit Risk Assessment Book, SBI 5. A Handbook on Credit, SBI 6. www.rbi.gov.in 7. Economic survey 2008-09 8. www.msme.gov.in

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